It is not disputed that the language quoted above is the precise holding of the Eisen court on the matter of preliminary mini-hearings in Rule 23 class actions. The question here is whether, in so holding, Eisen ruled sub silentio that any consideration of the merits of a case was impermissible prior to a class determination and/or the sending out of notice to the class. I rule here, as I have ruled previously,
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that a district court may consider the merits of a plaintiff's case in an action denominated as a class action by ruling upon a motion for summary judgment (or a motion to dismiss)
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prior to ruling upon a motion for class determination or requiring that notice be sent to the class, once a class has been determined. Nothing in either the Eisen decision nor Rule 23 itself precludes such a result.

In the previous Opinion in the case sub judice, it was determined that a plaintiff class existed under subdivision (b)(3) of Rule 23; that is, it was determined that questions of law or fact common to members of the class predominated over questions affecting only individual members and that a class action was superior to other available methods for adjudication of the controversy.
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Thus, as per the express language of subdivision (c)(2) of Rule 23 ("In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort."), one of the options now available to the court would be to order that individual notice be sent to identifiable class members at cost to the representative plaintiff. Because in this case the class has been certified but notice has not been sent, we are in a slightly different procedural context than existed in those cases wherein a court was faced simultaneously with a motion or motions for summary judgment along with a motion for class determination. Needless to say, those cases where, faced with the latter situation, the court granted the motion for class determination without considering a motion for summary judgment or granted a class determination motion without a motion for summary judgment having been filed,
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cannot be said to demonstrate the proposition that a court must determine class and direct that notice be sent before a motion to consider the merits of the case may be passed upon. The simple fact of the matter is that those cases did not consider the question with which we are faced in this case. By the same token, those cases wherein a court, having simultaneously before it motions for summary judgment and class determination, granted the former for the defendant and obviated the necessity for passing upon the latter, are persuasive only by implication, for they too fail to consider every aspect of the question before this court.
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In considering this question, the line of decision represented by Huff v. N. D. Cass Company of Alabama, 485 F.2d 710 (5th Cir. 1973), and Miller v. Mackey International Inc., 452 F.2d 424 (5th Cir. 1971) must be considered. In Huff, the Fifth Circuit Court of Appeals held that a representative plaintiff in an employment discrimination class action should not be disqualified by reason of an advance determination that his claim is predictably not a winning claim and that, therefore, he cannot adequately represent the class as mandated by Rule 23(a)(4). The Huff case cites and relies upon the following quotation from Miller v. Mackey Int'l, Inc.: "In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met." Id., 452 F.2d at 427. Presumably because both the Huff and Miller cases reverse district court decisions in which class actions were dismissed without class certification or notice to the class, they are cited inaccurately for the proposition that under no circumstances may a district court consider the merits of a case without first having set the class action mechanism in motion.

My reading of the Huff and Miller cases is that they do no more than set out the seemingly self-evident proposition that a class action motion is not a motion for summary judgment and may not be treated by the court as such. This point would seem to have been made in a decision which cites both the Miller case and the Eisen case at the Circuit level in support of its holding, Dorfman v. First Boston Corp., 62 F.R.D. 466 (E.D.Pa.1973) where it is stated:

The proposition for which the Huff, Miller and Dorfman cases stand -- that a class action motion may not be treated as a motion for summary judgment -- involves a separate and distinct issue from that under consideration here. The question here is whether or not a district court may pass upon a properly filed motion for summary judgment without first having activated the procedural safeguard of notice to all class members. I hold that in order to avoid a potentially needless expenditure of court time and plaintiff's money, it may. It need hardly be pointed out that if the decision on summary judgment is for plaintiff, that is either a judgment that questions of fact remain which necessitates a trial of the issues involved or a judgment for plaintiff on the merits, the opportunity always remains for the court to undertake class certification and/or notice to the class at that later stage without undue prejudice to either side.

The Eisen case itself presents no bar to such a holding because it does not address itself directly to the question here at hand. The precise question upon which the Eisen court ruled was whether a district court could conduct a preliminary mini-hearing on the merits of a class action in order to apportion the costs of notice. The preliminary minihearing, as explained in Dolgow v. Anderson, 43 F.R.D. 472 (E.D.N.Y.1968) and the district court opinion in Eisen, 54 F.R.D. 565 (S.D.N.Y.1972), was designed to effect a formal inquiry into the question of which side was more likely to prevail on the merits of the case so that the costs of notice could be apportioned according to the likely eventual outcome of the suit. It is readily apparent that because, as the Supreme Court pointed out, such a hearing would not be "accompanied by the traditional rules and procedures applicable to civil trials . . ." ( Id., 94 S. Ct. at 2153), serious problems of due process and what might be called civil double jeopardy are presented for class action defendants.

Summary judgment presents none of the difficulties which caused the Supreme Court to strike down the preliminary mini-hearing concept since, under the standard of Rule 56, it can constitute a final, appealable decision of the case. Because no court may resort to summary judgment determination until it has determined that no genuine issue of material fact remains in the case and only questions of law are left for resolution, the preliminary mini-hearing's spectre of placing the defendant in double peril is not presented. Moreover, Rule 56 and the case law interpreting it have clearly delineated the procedural protections entailed in handling a motion for summary judgment.

The strongest argument in favor of the proposition that the Supreme Court in Eisen meant to rule that no consideration of the merits of a nominal class action could take place until both class certification and notice to the class had been accomplished springs from the following language in the case: "Rule [23] was intended to insure that the judgment, whether favorable or not, would bind all class members who did not request exclusion from the suit." Eisen, 94 S. Ct. at 2152. The reasoning is that only where a decision on the merits has been preceded by both class certification and notice to the class can it be absolutely certain that the defendant will no longer be subject to liability from any potential class member on the same issue. See in this regard the en banc of the Third Circuit Court of Appeals in Katz v. Carte Blanche, supra.

In Count IV,
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plaintiffs argue that if this Court finds, as it has found, that defendants are regulated by the Sales Act, then the Court should find that the defendants are violating that Act by compounding interest; that is, applying the maximum permissible service charge rate to the total balance rather than the outstanding balance of charge customers' delinquent accounts. In Acker v. Provident National Bank, supra, Judge Hannum, having found as I have here that defendants' interest rate was governed by the Sales Act rather than the Banking Code, was faced with precisely the same issue in a nearly identical factual context. Having undertaken a detailed analysis of Sections 904 and 905 of the Sales Act, and having noted the significant fact that whereas other acts
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expressly prohibit the compounding of interest, no such prohibition appears in the Sales Act, Judge Hannum held that compounding service charges was legal in Pennsylvania under these circumstances. I fully adopt the reasoning and holding of Acker v. Provident National Bank as to Count IV of this case. Defendants' motion for summary judgment as to Count IV of plaintiffs' complaint will be granted.

Thus, the sole remaining issue in this case is whether the defendants were in violation of the Sales Act when they utilized the previous balance method of accounting to compute interest on customer revolving charge accounts. This issue, raised in Count II of plaintiffs' complaint, was neither present nor passed upon in Acker v. Provident National Bank.

The following illustration will serve to demonstrate the operation of the previous balance method and contrast it with computation of interest using variants of the average daily balance method which defendants now employ. In a situation where a bank operates on a calendar month billing cycle, on March 31, the last day of the billing cycle, the cardholder's previously clear account is charged with a $100.00 purchase. On April 6, the cardholder pays $75.00. On April 30, if the previous balance method is used, the cardholder will be charged $1.25 in interest, computed by multiplying the 1 1/4% service charge by the $100.00 previous balance. Actually, however, since the cardholder has owed $100.00 for only five days in April and $25.00 for the remaining 25 days, if a true or simple interest rate was utilized, the service charge would be only $.47 for the month of April.

On June 11, 1974, I entered an Order redefining the plaintiff class to include all holders of Bank-Americard and Master Charge credit cards issued by defendants PNB, Mellon and Equibank, who during the period of November 13, 1970 [January 21, 1972 as to Equibank] were charged a finance charge in connection with the purchase of goods and services.

(a) On the outstanding balance, one and one-quarter percent (1 1/4%) per month.

There being no statutory authority or case law stating directly that the previous balance method may not be used in Pennsylvania (or for that matter, that it may be used), plaintiffs' argument proceeds of necessity by implication. Plaintiffs contend that by use of the previous balance method defendants charged interest on indebtedness that was no longer "outstanding" and therefore charged interest greater than the 1 1/4% per month permissible under the Sales Act. Their basic point is to suggest that the term "outstanding balance" necessarily means the amount owing and unpaid and that, therefore, the Sales Act does not permit a service charge to be computed on a balance without first subtracting from that balance payments as received. Plaintiffs cite in support of their position Partain v. First National Bank of Montgomery, 467 F.2d 167 (5th Cir. 1972) wherein the Court of Appeals for the Fifth Circuit adopted such a position.

In considering this question it is important to note that the previous balance method has been widely employed since the early 1950's when revolving charge accounts first came into widespread use. It was the method used by virtually all retailers offering revolving credit in Pennsylvania at the time of the enactment of the Sales Act. At the present time, it is still apparently commonly used in this state and elsewhere, particularly by small retail stores. That the three banks who are defendants in this case and many other large institutions involved in retail financing no longer employ the previous balance method can be laid to the advent of more sophisticated computer technology in the late 1960's and early 1970's which made possible an instantaneously responsive billing system for a large number of customers.

The Seibert court went on to hold that since the California statute regulated only the nominal rate, any disparity between it and the true rate yielded through the use of the previous balance method was not illegal in that state. The same situation exists in Pennsylvania. In passing the Sales Act in 1966 the Pennsylvania legislature exercised the same judgment made by the California legislature and examined in the Seibert case and the same judgment later made by Congress in passing the Truth in Lending Act. All three bodies passed legislation setting a nominal rate of interest for revolving credit transactions. Plaintiffs' dispute is not with that nominal rate but with the true rate yielded under the statute. I find as did the California court in Seibert, supra, and the Ninth Circuit in Taylor v. R. H. Macy & Co., 481 F.2d 178 (9th Cir. 1973), considering the Truth in Lending Act, that the fact that the legislature considered the problem and did not feel it necessary to regulate or sanction either the previous balance or average daily balance method of computing interest on open-end revolving credit accounts, is persuasive evidence of the legality of those techniques.

For the reasons stated above, it would be inappropriate for this Court to second-guess the state legislature and hold the previous balance method to be illegal. Defendants' motion for summary judgment as to Count II of plaintiffs' complaint will be granted. An appropriate Order in accordance with this Opinion will be entered.

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